The global Foreign Exchange market oversees upwards of $5 trillion worth of trades every day. For such a huge value of transactions to go through, someone has to lose while another smiles all the way to the bank. When it comes to trading, all sorts of investors are involved, including large institutional players who move the market as well as small individual players whose emotions seem to make their stay in the Forex market short-lived.
The same has also happened to several traders despite their authoritative understanding of technical analysis. This is mainly because most of them jumped in without clear planning/establishing a strategy upon which to abide by regardless of market conditions. The inability to develop a strategy/plan robs off traders the tactical discipline required in a market that clearly has no masters.
Talk of Technical Analysis
If you are a trader and have no clue what technical analysis means, then you are likely to have confused this market with gambling. Trading has nothing to do with rolling the dice or drawing slots.
Technical analysis is a method that traders use to analyze various financial instruments. Technical analysts use charts and several trading tools to predict future price movements. Some of the tools include various indicators such as the Stochastic Oscillator, Relative Strength Index and Elliot’s Wave, among others.
In general terms, technical analysis helps traders identify possible profitable situations in the market by simply looking at the candlestick patterns, trend and combining the lot with a few indicators to try to narrow the margin of error. However, history tells me that 100% accuracy is never a possibility and that at some point, even the most successful traders do lose some bucks.
Volatility is an essential aspect in trading, and technical analysts apply their skills in identifying the next change in trend/reversal, the strength of a trend and possible breakouts. With technical analysis, some traders run the risk of using too many indicators and candlestick patterns such that making a decision on whether to buy or sell particular security becomes much harder. I have come across several technical analysis charts that will almost certainly frighten every novice in trading. This is where the use of tactics becomes more important.
Talk of Tactics in Trading
In trading, there are three types of traders. Day traders are those who trade very frequently sometimes a couple of times a day, or even more.
Then we have swing traders (I belong to this category) who identify crucial turning points based on various technical indicators and candlestick patterns. The periods in swing trading can vary from a four-hourly chart, a daily chart, weekly and even monthly. Mind you, some do try to use shorter periods, but speaking from experience, the medium periods seem to work well. Then, of course, you can use the shorter and longer period charts to narrow the margin for error in the medium period charts. That’s is just a simple synopsis of how I approach the market.
The third type of trader is the position trader who is long-form in nature and try to identify the course of the main trend and then take a position based on that regardless of the short-term price patterns.
Therefore, as part of strategy development, traders need to identify which type of trader they would like to be. After that, they can begin on narrowing the list of tactics they intend to use. For instance, there are traders that are good at News Trading, despite it being one of the hardest tactics to implement. Anyone can get burned as it is hard to determine when and when not to take a position following news that affects certain security.
Most traders get in late only to realize that the advance had already ended and lose while others ride on their luck. Generally, the clever ones try to anticipate the news and get in even before the news release. In addition to this category, there are also those that will try and anticipate a pullback following a news release and will instead take a reverse position to the prevailing trend.
There are other complicated tactics. For instance, some traders know that institutional investors move the price. Therefore, they are able to identify points on the candlestick chart that indicate some heavy institutional buying or selling. Ideally, these points are also referred to as demand points/zones in the case of buying and supply points/zones in the case selling.
The tactic here is based upon the assumption that institutional investors will attempt to take a similar position to the one they took some time back when the price of the security reaches the same level/zone. Now, considering the fact that institutional traders buy/sell heavy, the price of the underlying security is bound to move significantly in one direction depending on their positions. In this case, the tactic would be to place a similar trade and wait for the institutional traders to move the market.
Another and very common tactic is to follow/copy the trades of reputable traders who have showcased a solid trading record with high winning rates, which you can do very easily on SprinkleBit. However, sometimes you may choose to change how many trades you follow because the equity levels of the trader you intend to follow could be high enough to provide him with the privilege of taking certain levels of risk and making several trades at a time. So again here, you may need to be tactful in and put emotions to bed. This shows that tactics are as good as techniques in trading and if ignored, then it could all end badly for the trader.
The bottom line is that using both tactics and technical analysis to trade is crucial for traders. In fact, having a solid understanding of technical analysis can help traders in establishing new tactics, which in turn help in maintaining discipline against emotional trading. Once you come up with your trading plan, you will find it easier to maintain discipline and avoid emotional trading. The market can be very tempting, but it also punishes unkindly.